IMF and World Bank Support US$3 billion In Debt Service Relief For Tanzania Under Enhanced HIPC Initiative

The International Monetary Fund (IMF) and the World Bank's International Development Association (IDA) agreed today that Tanzania has taken the steps necessary to reach its completion point under the enhanced framework of the Heavily Indebted Poor Countries (HIPC) Initiative. Tanzania becomes the fourth country to reach this point (joining Bolivia, Mozambique and Uganda).

Debt service relief under the enhanced HIPC Initiative from all of Tanzania's creditors will amount to approximately US$3 billion over time (US$2.026 billion in net present value [NPV] terms). As a result of HIPC assistance, the net present value of Tanzania's total external debt is reduced by some 54 percent. The NPV of debt-to-export ratio is expected to remain well below the target ceiling of 150 percent throughout the period 2000-2020. Moreover, after taking into account additional bilateral assistance beyond the enhanced HIPC Initiative, the debt ratios fall even further.

Debt service payments are cut substantially—by an average of 47 percent over time—from about US$193 million in fiscal year1 1999/2000 (actually paid before HIPC assistance) to an average of US$116 million during 2001/02 to 2010/11, and US$87 million during 2011/12-2020/21. Debt service as a percentage of government revenue is reduced from 19 percent in 2000/2001 before HIPC assistance to an average after HIPC relief of 7.7 percent over 2000/01-2010/11 and 4.4 percent over 2011/12 -2020/21. Resources made available by debt relief provided under the HIPC Initiative will be allocated to key anti-poverty programs, which are outlined in Tanzania's Poverty Reduction Strategy Paper (PRSP).

The debt relief required of multilateral creditors under the enhanced HIPC Initiative amounts to US$1.020 billion in NPV terms. IDA will provide debt relief under the enhanced HIPC Initiative of US$694.5 million in NPV terms, delivered through a 69 percent reduction in debt service on IDA credits disbursed and outstanding as of end-June 1999. The IMF will provide debt relief of some US$120 million in NPV terms. HIPC relief required of bilateral and commercial creditors amounts to US$1.006 billion in NPV terms. Tanzania has negotiated a debt rescheduling agreement with the Paris Club on Cologne terms. Some 10 percent of Tanzania's HIPC relief is expected to be delivered by non-Paris Club and commercial creditors. Tanzanian authorities are continuing their efforts to obtain comparable treatment from these creditors.

ANNEX

1. Tanzania

Steps Taken to Reach the Completion Point Under the Enhanced HIPC Initiative

Tanzania's eligibility for debt relief under the enhanced HIPC Initiative underscores recognition by the international community of its continued progress in implementing sound macroeconomic and structural policies, and of the overall quality of its Poverty Reduction Strategy Paper (PRSP).

Upon reaching its decision point under the enhanced framework of the HIPC Initiative in April 2000, Tanzania committed to undertake work in three areas in order to reach the completion point and receive irrevocable debt relief under the enhanced framework:

Completion of a full PRSP and implementation of the poverty reduction strategy for at least one year;

Continued implementation of strong macroeconomic and structural policies supported by an IMF Poverty Reduction and Growth Facility (PRGF) program; and,

Implementation of a set of social, structural and institutional reforms.

Poverty Reduction Strategy Paper: Tanzania's PRSP has been welcomed within Tanzania and by the donor community as an important step forward in the process of focusing on poverty as an explicit objective of public policy. It built on a process that started with the adoption of the National Poverty Eradication Strategy in 1997 and has been continued in the context of annual and multi-year public expenditure reviews. Participation in public discussions leading up to the PRSP has been broad, and the document represents a truly homegrown development strategy. In October 2001, Tanzania presented a PRSP Progress Report.

The Economic Program:

Tanzania has established a solid record of economic performance over the past several years. GDP growth increased to 4.9 percent in 2000 and is expected to remain at a similar level in 2001, despite the negative effects on commodity prices and tourism of the slowdown of the world economy. Inflation was reduced from seven percent to five percent from 1999 to 2001, and the current account deficit of the balance of payments declined from 12 percent of GDP in 1999 to less than 10 percent of GDP for 2000.

Key Policy Measures and Reforms:

Overall, Tanzania has made substantial progress in carrying out the specific structural reforms and institutional strengthening the authorities identified at the time of the decision point. In governance and financial management, important steps have been taken to improve transparency, including by adopting, publishing and disseminating the national action plan for the control of corruption. Significant progress was also made in other areas, such as tax reform, improvement of the business climate, and strengthening the performance of utilities.

In the health sector, Tanzania has successfully implemented a program to ensure immunization of at least 75 percent of children under the age of two against measles and diphtheria, and has implemented a national campaign against HIV-AIDS, including completion of visits to three-quarters of all districts.

In education, the government has undertaken important initiatives to increase access to, and improve, education. In cooperation with donors, the government has launched an Education Sector Development Program with a chief aim of increasing access to schools, particularly in poor and underserved areas while alleviating the cost burden on households. Progress has been achieved, particularly at the primary level. Budgets have been increased, school fees have been abolished, and a school mapping exercise is well underway.

2. General

The HIPC Initiative was launched by the IMF and the World Bank in 1996 as the first comprehensive effort to eliminate unsustainable debt in the world's poorest, most heavily indebted countries. In October 1999, the international community agreed to make the Initiative broader, deeper and faster by increasing the number of eligible countries, raising the amount of debt relief each eligible country will receive, and speeding up its delivery. The enhanced HIPC Initiative aims at reducing the NPV of debt at the decision point to a maximum of 150 percent of exports or 250 percent of government revenue, and will be provided on top of traditional debt relief mechanisms (Paris Club debt rescheduling on Naples terms, involving 67 percent debt reduction in NPV terms and at least comparable action by other bilateral creditors).

Eligible countries will qualify for debt relief in two stages. In the first stage, the debtor country will need to demonstrate the capacity to use prudently the assistance granted by establishing a satisfactory track record, normally of three years, under IMF- and IDA-supported programs. In the second stage, after reaching the decision point under the Initiative, the country will implement a full-fledged poverty reduction strategy, which has been prepared with broad participation of civil society, and an agreed set of measures aimed at enhancing economic growth. During this stage, the IMF and IDA grant interim relief, provided that the country stays on track with its IMF- and IDA-supported program. In addition, Paris Club creditors, and possibly others, are expected to grant debt relief on highly concessional terms. At the end of the second stage, when the floating completion point has been reached, the IMF and IDA will provide the remainder of the committed debt relief, while Paris Club creditors will enter into a highly concessional stock-of-debt operation with the country involved. Other multilateral and bilateral creditors will need to contribute to the debt relief on comparable terms.

Some three dozen HIPCs are expected to qualify for assistance under the enhanced HIPC Initiative, the great majority of which are sub-Saharan African countries. Debt relief packages are now in place for 24 countries under the enhanced HIPC Initiative framework: Benin, Bolivia, Burkina Faso, Cameroon, Chad, Ethiopia, The Gambia, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, São Tome & Príncipe, Senegal, Tanzania, Uganda and Zambia, for total committed assistance estimated at more than US$36 billion, representing, with other sources of debt relief, an average NPV stock-of-debt reduction of nearly two-thirds.